According to Steven Taylor of Taylor, Equities a real estate private equity firm raises capital from investors. These investors are called Limited Partners. They then use the capital to obtain and develop real estate properties. The firm can also be involved in operating, improving, and reselling the properties in order to see a return. Firms use an active management strategy and take a diversified approach to owning properties.
There are many different types of outside investors or Limited Partners. A few examples are insurance firms, high-net-worth individuals, pension funds, family offices, and endowments.
Real estate private equity firms most commonly focus on commercial properties such as offices, retail, industrial, multifamily, and other properties, although it is possible for a REPE firm to purchase residential buildings.
Who can participate in private equity real estate?
If you’re interested in getting involved in private equity, there are a few things to consider. Your ability to take part in investing in private equity real estate will be determined by the amount of money you have available to invest. A traditional private-equity fund requires partners to invest a minimum of $250,000. In general, firm managers prefer institutions and individuals who can contribute above $25 million in a long-term investment collective in combination with other investors.
Individuals who are interested in getting involved in real estate private equity should examine their options of firms, and further their options of funds within that firm.
How do you examine a private equity fund’s investment structure?
To take part in most private equity funds, you must pay a number of fees for management and performance. Many REPE funds include annual fees in order to pay for legal services, data costs, firm salaries, deal sourcing, research, marketing, and other variable and fixed costs. If you are considering getting involved in private equity real estate, it is essential that you understand these fees before investing.
Most REPE managers also collect “carry.” A “carry” is a fee based on performance that is typically 20% of excess gross profits of the fund.
Individuals should also examine what would happen in the case that they fail to meet a capital call. In some cases, a fund may force and individual or institution to default and forfeit their ownership shares.
What types of strategy does private equity real estate employ?
In PERE, there are a few main strategy types:
- Core PERE strategy: Core strategy is generally the most conservative strategy. This method sometimes only includes properties that offer low risk and therefore lower potential returns. These types of properties usually exist in popular and high traffic locations. Core strategy may focus on high-value properties that don’t require much development or upkeep.
- Core-plus strategy: Core plus strategy requires more of a gamble, but can also offer a higher ROI than a core method strategy. These properties usually require more modest amounts of upgrades and improvements.
- Value added strategy: Value added is a moderate risk method with a medium-to-high-return. This approach is more focused on property development and working the market. Managers often purchase properties, redevelopment them for improvement, and then resell at the right time with added value.
- Opportunistic strategy: An opportunistic strategy returns the highest amount but assumes the most risk. Managers usually purchase properties that involve undeveloped land, or properties that are in markets with low traffic that typically don’t perform well. – Steven Taylor, Taylor Equities